The phrase “Other People’s Money” comes up regularly on different websites, especially on those that are trying to help you get financially free. And there’s a good reason for that…
You can get rich much quicker when you are using “Other People’s Money”!
I first heard the phrase “other people’s money” from Robert Kiyosaki’s books. As you’ll hear me mention quite often, Kiyosaki has been a great influence on me throughout the years.
When you think about it, using other people’s money (OPM) is a simple concept. You leverage other people’s money to help you make more money than you could by yourself.
Let’s say you have $20,000 to invest and 15 years to make it do something. So what can you do with it…
You could play it safe and put it in the bank for 15 years and, with a lucky 1% interest rate compounded monthly, you can turn that into $23,235.23… a $3,235.23 profit. Not too shabby for doing nothing… don’t forget though that inflation will not only take away your profit, but it will eat away at some of your initial investment as well. So, that’s probably not that great of an option.
On the other hand, you could take advantage of OPM and a possibly better option (and this is just one of many)…
Buy a Rental House
Let’s use a simplified example here. With your investment, you can find and buy a rental house for roughly $100,000. This number is derived by just figuring a standard 20% down, but know that there are sometimes ways for loan officers to do some creative financing tricks to allow you to put less down. Regardless, in this example, we have $20,000 and, with our $100,000 house, that means we need a mortgage of $80,000.
Keeping it simple, let’s say we get a 15-year fixed interest rate of 5%. That would make your monthly payment $632.63, but with property taxes, insurance, etc, let’s just say it’s $800 per month.
Now comes the fun part…
Staying with our example, we’ll assume that the going rent is $1,000 per month. That means that after you pay your mortgage and other fees noted above, that leaves you with $200 per month or a total of $36,000 after 15 years… MUCH better than the $3,200 interest you were getting from the bank!!
Now, as a rental house owner myself, I’m going to tell you that the $200 profit per month is probably not going to happen. Will you make money? Maybe a little, but problems do happen and they will need fixed. In fact, I would implore you to not even think about making a monthly profit. Hopefully you will make a little bit of money, but that’s not what you should concentrate on or even the best part of owning a rental(s).
Sure there’s the tax benefits that you get every year, but that’s still not the best part.
There are actually two things that I consider to be the best part…
You have a fixed interest rate on the loan. So, even though your payment will stay the same on this house every year, rent will go up. It’s just the nature of life – inflation. You still need to follow market rent and take care of your renters, but rent does inevitably go up. So over time, you’ll start to see more of a profit after paying your mortgage every month.
And the other best part? After 15 years, you still own this asset. Now you no longer have a mortgage payment, so the majority of that monthly rent check will be all yours. Let’s stay conservative and say that with rent increases over the 15-year span, you now take in $1,200 of rental income every month. Maybe after taking care of taxes, insurance, and repair costs, you now see $900 every month… for life. And this will still rise with rent increases periodically throughout the years.
That is using Other People’s Money to set yourself up with passive income. If you want to retire early, this is a great route to take to do it!
Imagine if you followed this same process and bought another rental after another few years… and then another down the line. If you owned a handful of rentals, you could be set for life.
You could sell your rental and hopefully the house will have appreciated to give you a nice payout, but, unless you really need that money all at once, why bother (unless you’re selling to buy another property)? Enjoy the passive income! You might, however, be able to refinance it down the line when the property appreciates and take out your original investment to invest elsewhere (another property perhaps?). Now you don’t have any skin in the game and you’re using OPM at its best!
I currently own one rental house that I’ve been renting out for the past six years. Right now I make a few bucks on it, but really I’m not even thinking about it. I’m using the bank’s money to pay for the mortgage and letting the tenants pay the bank back. For the most part, it’s out of sight and out of mind for me. I’m on track to have it paid off in nine more years and that’s when things will getting really exciting with the passive income!
I’m now shopping for another property and I’m considering “upping the ante” a little bit and getting a multi-family property, such as a 4-8 unit apartment building. I would like to have a minimum of 4 rental properties or an apartment building to pay me passive income as I near retirement.
Some of you might be thinking:
But, Jim – I don’t want to be answering the phone for a broken toilet at 3am. I’m not even good at fixing things or don’t care to do it. This sounds like a real nightmare!!
I hear you. And, if that’s what you’re thinking, you’re a lot like I am and you need a property manager. I’ll discuss this in a later post, but they just handle everything for a small fee (generally 5-10% of the rent) – a small price to pay if you’re not a hands-on person (or don’t want to be).
Remember, the best way to start making more money is to use other people’s money!! But before you even consider going down this path, make sure that you get out of any debt you are in first.
Enjoy your day and thanks for listening!
6 thoughts on “Why You Should Use Other People’s Money”
The OPM idea works. It works in ideal environment. It works really great if you always have tenants in your rentals and they are paying. But in time of vacancy rental owners chasing for renters because they need them ASAP, otherwise they will not have money for paying OPM back.
I like the concept of using OPM but I also like to have an emergency fund of 3-6 months of expenses, just in case if I need to cover vacancy, or damaged water heater
I agree with you 100% – you definitely need to position yourself financially so you can withstand the downs and not just the ups.
That’s another reason I appreciate having a property management company. Reputable ones will have much stricter requirements for renters and they know some (not all) of the gotchas that you can run into. That can help provide for renters that will *usually* be better in the long run.
Great post about getting into rental properties. I’m pushing in that direction, getting rid of debt and building cash reserves for the investment.
I’m also learning about OPM for investment from the start, so I won’t have to use banks at all. Find investors with cash and they become your bank. I’m reading a book about it, just started.
Now that’s the way to do it! A lot of real estate investors find ways to riches by working with outside investors to handle most, if not all, of the costs of an investment. Good luck, but be cautious as well!
I love this way of thinking. I really need to get into investing!!
Thanks, Francesca! I think the saying goes… The best time to start investing was years ago. The second best time to start investing is today.
We just paid off the mortgage on one of our properties – well, actually the tenants did – so now we’ll actually get to see even more value from it!